Despite public concern over fast-rising consumer prices, the government still opposes the suspension of the value-added tax, or VAT, on fuel and electricity sales. And this is for several reasons: that the state will end up forgoing billions of pesos in VAT collections, and this will adversely impact on public spending for infrastructure and basic services; and that the VAT suspension will benefit more the rich than the poor, and will thus be inequitable.

To an extent, the government is correct. Any tax forgone is obviously money that can otherwise be used to build schools, hospitals and roads, as well as buy seeds and fertilizer for rice farmers. Thus, the VAT suspension indirectly impacts the public by way of less funding for public services. But to begin with, there was no VAT on fuel and electricity sales until 2006. And since then, while there were significant revenues reportedly from the tax in the last two-and-a-half years, it does not seem as though there was any significant improvement in public services.

If at all, fiscal numbers had improved as the budget deficit went down, but it remains uncertain whether people can actually feel any “direct” benefit from it. Neither can one confidently claim that additional tax revenues did not just end up lining the pockets of corrupt and unscrupulous public officials and their accomplices. It is thus difficult to understand why the government insists on denying people a “direct” benefit through VAT-free fuel and electricity, and persists on the roundabout way of keeping the sales tax on fuel and electricity and using the same to “indirectly” benefit consumers by financing public services.

As for VAT suspension being inequitable, this, also, is not always the case. Ultimately, in the midst of rising consumer prices, most crucial is the improvement of people’s income, or their take-home pay. After all, if their pay is high, then the rising prices of goods can be mitigated. But barring any significant increases in wages, their income or spending or purchasing power can also be improved by price cuts or discounts or subsidies. And temporarily suspending the VAT on fuel and electricity can help in this. No matter how miniscule the discount, it still accrues to all who consume fuel and electricity. There is no inequity in that. After all, everybody, directly or indirectly, consumes fuel and electricity.

The VAT is essentially a consumption tax, and thus comprises a specific fixed percentage of spending—technically 12 percent of VAT-able spending—regardless whether one is rich or poor. And with or without the tax, spending patterns and ratios are not inclined to change. After all, people generally will not use more electricity or fuel than they need, except maybe those who are extremely extravagant or wasteful. In this sense, it will be difficult to argue that removing the VAT will benefit the rich more just because they consume more, for this is not necessarily the case. All who consume fuel and electricity will enjoy the 12-percent price discount across-the-board, regardless of being rich or poor.

However, in terms of absolute values, more tax revenues are obviously forgone from people who can actually afford them, and, perhaps, evade them. And, perhaps, this may be seen as inequitable. But it is doubtful if such will actually concern consumers. It does not seem to matter to Juan de la Cruz that his neighbor, a rich fellow who consumes twice as much fuel and electricity than him, will save twice as much, as well, with the VAT suspension. Provided, however, that Juan de la Cruz himself enjoys a similar price discount, and at the same rate at that.

There is merit to taxing the rich more and the poor less, even if this may seem inequitable for some. Essentially, the rich can afford to subsidize the poor by giving up a bigger portion of their income, and perhaps rightly so. But it also seems inequitable that those who have less in life, and thus contribute lower taxes, must always have more in law. The poor already enjoy subsidized electricity prices, and now the government is even contemplating additional benefits for them. Never mind the rich, really. They can afford to fend for themselves. The middle class, however, is a different story. Many of them can barely make ends meet, and are striving hard to avoid poverty. And yet, when it comes to additional tax benefits, they are denied assistance given their economic stature.

The VAT suspension on fuel and electricity will ultimately benefit mostly the middle class, and government data indicate this: 85 percent of total electric consumption and 82 percent of total fuel consumption is by those earning P100,000 and above, with the majority finding themselves in the P100,000 to P300,000 bracket—or those earning P8,500 to P25,000 a month. While not exactly poor, these people are not rich, either. And yet, by refusing to suspend the VAT on fuel and electricity, the government burdens them the most. It will not necessarily be bad to give the middle class a break, for a change. These people do not enjoy any form of subsidy for electricity, unlike the poor benefitting from lifeline subsidies partly taken from the middle class, as well. These are also the people who austerely consume fuel and electricity.

Assuming the government, through legislation, suspends the VAT on fuel and electricity, what will be its impact on the budget deficit and on the GDP-deficit ratio? While the impact may be significant, perhaps it will be relatively small compared with the country’s previous GDP-deficit ratios in the last 15 to 20 years. The government has seen worse, and it is doubtful whether the state is in such dire financial straits now that it cannot put on hold for a year or two its goal of balancing the budget. Is there no way for the government to bless consumers either with VAT-free fuel or VAT-free electricity for six months to one year?

There is a middle way, actually. Congress can suspend the VAT on electricity for one year, and over the same period, the government can borrow short term from abroad to buy back 60 percent of Petron from its private owners. And then it can earmark a portion of the VAT on fuel to pay back what was borrowed. And once fully government-owned again, Petron can sell fuel to the public at subsidized prices.

It is difficult to defend in public the technocratic viewpoint that VAT exemptions will result in forgone revenues and lower public spending. Of course, it will. But many will argue it is the same revenues that the government will spend on the people, anyway, so why not just let them “enjoy” it directly by giving them the tax discount? There should be a political solution to the issue—something that people can easily understand and accept, and something that can be defended at Plaza Miranda. Raising the specter of revenue losses and its impact on government spending on other vital services does not quite cut it, particularly with the middle class. An ivory-tower approach simply appears too insensitive to their plight. 

Comments to matort@yahoo.com

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